Despite the wealth boom, “disproportionately few” advisors will reap the full benefits of rising global wealth, according to Forbes contributor Russ Alan Prince.
Mr. Prince stated, “the investable assets are gravitating to fewer and fewer (advisors). It is becoming winner-take-most, and there are relatively few winners.”
“This does not mean that the great majority of financial advisors will not be able to make a good living,” Prince said, “What it does mean is that a small, but meaningful, percentage of financial advisors will be able to become substantially wealthy in their own right.”
The Wealth Boom Is Real
Even if fewer advisors may not benefit from the full extent of the wealth boom, the pie is still getting bigger:
- The Boston Consulting Group’s Global Wealth 2018 report stated that global personal wealth grew to $201.9 trillion in 2017, a 12% increase from 2016.
- The number of billionaires worldwide hit a record high in 2017, rising up to 2,754 individuals.
- Hong Kong recently surpassed New York as home to the most ultra-wealthy residents in the world. More than 10,000 people in Hong Kong have a net worth of more than $30 million; New York has roughly 9,000.
- The number of Fidelity 401(k) millionaires hit an all-time high, per USA Today.
But the Challenges Wealth Managers Face Are Real, Too
Advisories cannot fully enjoy a wealth boom and maintain sustainability if their profit margins are shrinking.
According to a TD Ameritrade Institutional survey, the median operating profit at RIAs in 2017 fell to 20% from 24% in 2016. The same survey found that firms generated, on average, 71 basis points of revenue on every dollar in AUM in 2017, in comparison to a recent peak of 78 basis points in 2015.
In addition, a McKinsey & Company 2016 report highlighted other challenges (that still affect the present):
Fees as a percentage of assets fell in 2016 to 1.13%, down from 1.16% in 2015.
Decreasing revenues per advisor
In spite of growing assets under management per advisor, revenues per advisor declined for two consecutive years (2015-2016).
Fewer commissionable equity trades per advisor
The number per advisor hit a low of 214 in 2016 , down 22% from 2013.
Fewer new clients per advisor
Advisors have been adding fewer new clients, and 2016 saw a new low, with an average of just 7.5 new household relationships, compared to 8.3 in 2013.
In terms of generational AUM, the Greatest Generation (before 1945) and the Baby Boomers (1946-1965) account for 40% and 50% of it, respectively.
Meanwhile, Generation X (1966-1980) and Generation Y/Millennials (after 1981) respectively account for only 8% and 2% of the managed assets.
It’s not unusual for younger generations to have fewer investable assets, but the lack of growth from Generation X is a concern. Wealth management firms will have to consider their strategies to attract new clients and grow their wealth with the fewer resources they have.
PriceMetrix chief customer officer Patrick Kennedy, in a podcast interview with McKinsey, summarized the demographic challenge wealth managers face:
“As (the older demographic) ages and accumulates more wealth, to me it looks like I’m doing a great job, my book’s growing. But then you hit a certain point and often that very concentrated demographic will turn around and start to spend the wealth that they have. In many cases, they’ll start to pass it on to other generations. And suddenly, as a financial adviser, I’m not growing anymore. In fact, my business is quite a bit in jeopardy because I wasn’t thinking about that next generation.”
How Wealth Managers Can Overcome the Challenges
Business Development and Marketing Strategies
There are over 12,000 employed Registered Investment Advisors in the United States alone. If they want to attract new clients, wealth managers need to stand out from their competitors.
John Bowen, author of Elite Wealth Planning: Lessons From the Super Rich, said, “The most successful financial advisors will be the ones who are extremely capable when it comes to business development. They will be the ones with sterling professional brands; they will be thought leaders. These financial advisors will also be able to source new and ever wealthier clients by creating strategic partnerships with other professionals such as trusts and estate attorneys and accountants who have high-net-worth practices.”
Being a thought leader is not about direct selling and promotion of services. Rather, it’s about helping others.
Whether it’s paid ads or content promoting smart saving and spending habits, or hosting retirement planning seminars open to the public, these are just a few ways wealth managers can stay top of mind with potential clients.
Younger and International Clientele
As an extension of marketing, consider clients beyond the Greatest Generation and Baby Boomers, as one day advisors will no longer be managing their wealth.
Marketing to the next generation will be key to keeping the business going, and those thought leadership efforts, perhaps younger audiences to save and invest, will put advisors in a position to handle the next crop of wealth.
And beyond the domestic markets, wealth management firms can look to new growth areas like Asia, where wealth is growing so fast that the talent to manage that wealth cannot keep pace.
Language and culture differences, understanding client needs, and navigating the regulatory environments will be some roadblocks in pursuing an international strategy, but the opportunities are there.
Taking Advantage of Technology
Robo-advising might be seen as a technological rival to the traditional wealth manager, but technology and RPA (robotic process automation) itself doesn’t have to be a threat.
By adopting a “hybrid advisory model“, firms can leverage technology to compliment the human touch they provide for their clients.
In this model, wealth managers can automate client profiling, investment strategy and asset allocation, performance analysis, rebalancing and reporting. They can also provide clients a single platform to instantly access their financial information from their devices, which an increasingly tech savvy populace will demand.
In turn, this allows advisors more time to focus on high-touch services like comprehensive financial planning strategies. Also, the hybrid model allows for scalability in serving more clients while making themselves available to those who still request the human communication.
As WealthManagement.com stated, a hybrid service model gives clients the flexibility to choose how much human and digital interaction they want with the advisor, from the level of advice received and product access to greater flexibility around fee structure and preferences around the digital experience.
Outsourcing a variety of functions, be it accounting, HR, compliance or back-office operations (i.e. reconciliation reporting), may help reduce wealth managers’ costs and improve efficiency.
Advisories Can Enjoy Their Share of the Wealth Boom
The global wealth boom is real, but only a disproportionate few are poised to benefit, unless wealth managers take the right steps.
While thinking about a larger share of a growing pie, firms must tackle fundamental issues like declining fees and profit margins, and they need to address demographic changes and how to use technology to their advantage.
A more robust business development and marketing campaign will promote brand awareness and expand clientele, and establishing thought leadership will keep the firm top of mind with new audiences when they’re ready to commit.
Leveraging technology, adopting hybrid models can improve client servicing and scalability, and outsourcing various functions can help cut costs.
By addressing the fundamental issues while thinking about growth, wealth managers can attain their rightful share of a growing pie thanks to the wealth boom.
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